We are downgrading our recommendation on Hudson City Bancorp (HCBK) to Underperform. It reported a loss on a GAAP basis in the first quarter of 2011 for the completion of the balance sheet restructuring during the quarter. Lower interest and dividend income, and increased non-interest expense, were on the downside.

Going forward, the low interest rate environment would likely result in a compression of the net interest margin from its new higher level resulting from the restructuring transaction, and in combination with the reduction in the size of its balance sheet from the restructuring transaction, would lead to a reduction of net interest income.

While its strong business model and solid capital position would aid results, the dividend cut somewhat dampens investors appetite for the stock. Increase in FDIC insurance costs also remains an overhang.